RBS’s light at end of the tunnel could be train that flattens it

AS the Royal Bank of Scotland boss Stephen Hester toured the broadcasters’ studios yesterday, he kept repeating the same mantras. He is “fixing RBS”; it is going from an “okay company” to being a “really good bank”; and “RBS will be ready to be privatised within the next couple of years”.

He also told the Today programme’s John Humphrys: “The clean-up of RBS is entering its last phases. Privatisation is now a light coming down the tunnel”. My worry is that the oncoming light that Hester discerns is not the sunny uplands of a reprivatised RBS, but an oncoming express train.

When Gordon Brown’s government acquired an 83 per cent stake in RBS five years ago, it significantly over-paid for the privilege. It may have been due to the speed with which the rescue package had to be put together, or the Labour government’s reliance on a small clique of investment bankers to arrange the terms of the bailout, or the absence of any proper due diligence, or just sheer terror in Number 10 that an institution with total ‘assets’ of £2.4 trillion, which dwarfed UK’s gross domestic product of £1.45 trillion, would otherwise fail.

But whether he was held to ransom or not, Brown ended up overpaying for the controlling stake in a bank about which he knew little. Like Banquo’s ghost this has come back to haunt the whole unfolding tragedy of RBS ever since.

At the time of the £45.5bn bailout, we were told the UK government would have nothing to do with the running of the bank. Instead, it was said that the government’s stake would be administered by a new quango – UK Financial Investments – which was described as a “buffer zone” between the Treasury and the bank, and was staffed by a bunch of superannuated investment bankers. Then the incoming team at RBS, led by chairman Sir Philip Hampton and Hester, reassured us that they would be able to turn RBS around and restore it to “stand alone strength” in three to five years.

That sort of thing is possible. After all, when US taxpayers exited Citigroup and it was reprivatised in January 2011, they did so at a $12.3bn profit. But there are significant differences between how the US handled its bailouts and how they were handled here. The first was that, when the Troubled Asset Relief Program bought its original 33 per cent stake in Citi in 2008, it was bought at a realistic price, and the second is that the government of President Obama did not seek to micromanage its investment in Citi, or to constantly move the goalposts.

The idea that RBS is run by Hester is increasingly becoming a charade. In recent weeks Chancellor George Osborne has been meddling like crazy. It was he who instructed the bank to pay its £381m Libor fine out of bonuses, he who orchestrated the departure of investment bank chief John Hourican, who has been agitating for accelerated retrenchment to the UK retail and commercial banking sector, and he who is forcing the bank to sell its US arm Citizens Financial. The enforced disposals, some of which are driven by political rather than commercial logic, follow the disposals required by the EU, including the ‘Project Rainbow’ branches and Direct Line, both of which Hester now – optimistically – proposes to sell off in tranches on the London stock exchange.

One consequence of governmental indecisiveness about what to do about banking and interventionism with regard to RBS is that were are today no closer to reprivatising RBS than we were five years ago. And there are still plenty of legacy issues that make it unattractive to stock market investors.

For a start, there are still lots of unturned stones inside the bank, and many of them have future litigation risks lurking beneath them. The £381m Libor rigging fine, £700m for mis-selling interest rate swaps and an additional £450m for payment protection insurance mis-selling which contributed to the £5.17bn losses announced yesterday, are probably the thin end of a very expensive wedge.

Hester says he wants RBS to become a “really good bank”. If he is serious about this, then he really ought to take a closer look at the activiites of the bank’s distressed assets division – variously known as Specialised Lending Services, West Register and Global Restructuring Group.

Last September, City of London Police announced they were investigating allegations that the bank has “manufactured defaults” – through the deliberate undervaluations of customers’ property assets or through arbitrary changes to lending agreements – in order to tip customer firms that were otherwise trading successfully into its Global Restructuring Group.

Once they’re there, the bank appears to have few qualms about feasting on their carcasses. Unaddressed, this too could turn into a train that could flatten RBS.